Nervous about the stock market?

By: Scott Sturgeon, JD, MBA, CFP®

Would you like to receive more content just like this directly to your inbox? Click here to subscribe!

Investing, by its nature, is hard. Whether you’re retired, nearing retirement, or retirement is 30 years out, you’ve probably been painfully reminded over the last few months that when it comes to investing, there are several factors that can lead to negative returns. Geopolitical conflicts, changes in interest rates, inflation, the list goes on and on. It’s important to note, however, that of all the reasons your investment portfolio might go down, there are two categories to watch out for.

The first category to watch out for are reasons you ultimately can’t control. External factors you can’t see coming and have very little personal ability to change. In the present day, the conflict in Ukraine and rising interest rates domestically have combined to weigh heavily on both stocks and fixed income investments. Unfortunately, in your day to day life, there probably isn’t a whole lot you can do individually to change those two themes.

The second category are elements that you can completely control. Namely, what you buy, when you buy it, what you sell, when you sell it, and maybe just as importantly, what you don’t buy and don’t sell. What investors often fail to realize is that while both categories have the potential to weigh negatively on returns, it’s often the things you can control that actually have the greatest potential to negatively impact your investment returns over long periods of time.

How things you can control may harm returns

The concept of buying low and selling high is easy to say, but significantly harder to execute on. When your investment portfolios are rapidly declining in value or experiencing times of high volatility, it’s perfectly natural to want to simply exit the situation entirely. “Sell it all!”, “Go to cash!”, “Stop the bleeding!”, “I don’t think I can take much more”, are all common thoughts and actual phrases spoken by investors as they watch their portfolio drop. The fight or flight mechanism kicks in and fearing a complete loss in value, many investors flee, selling as the market is in decline or as it nears the bottom of a decline.

This causes a problem for two reasons. First, trying to time the stock market is statistically very difficult to do. Fortunes have been won, but many more have been lost trying to move in and out of the market pursuing a perceived opportunity or avoiding a perceived threat. The reason is because market performance, whether good or bad, is often dictated by only a few specific trading days. Miss out on even a couple of those best days and your long term performance can suffer significantly.

A recent study by Putnam Investments noted that a $10,000 investment made in the S&P 500 in 2000 would have grown to $22,118 in 2014. If you missed the best 10 days during that 14 year timeframe, your balance in 2014 would be around half of $22,118.

So if we know it’s important to be invested on the market’s best days, the obvious question that arises from this scenario is…why not just buy in on the best days?

This brings about the second reason trying to time the market is a flawed strategy. Buying on the best days is difficult because they are almost impossible to predict and often occur during some of the worst periods of broader market performance. During the same study mentioned above, it was determined that from 2000 to 2014, seven of the 10 best days in the market were deep in bear markets when stocks had been declining for some time. Two of those seven days occurred were very shortly after the market bottomed during the Great Recession in 2009.

For investors who moved their investment accounts into cash at some point during that timeframe, the likelihood they would have bought back in just as one of the worst bear markets in history was turning into one of the greatest bull runs in history, would seem to be low.

The reality is when it comes to investing, it’s easy to let emotions influence your decision making. When you see flashing red ticker symbols and various news and media outlets reporting like there’s hysteria in the streets because the market is down, our brains are hardwired to look for safety. In those instances, your mind can fill with thoughts of dread and your emotions may drive you to react when that action may actually be completely counterproductive to your long term goals.

So what can you do with your portfolio in times like this? 

At Oread Wealth Partners, all of our clients go through a comprehensive planning process that incorporates multiple elements of their financial picture. Tax planning, insurance, employee benefits, cashflow needs, and investing, to name a few. The objective in doing so is to help provide perspective on how financial decisions and events today can impact your likelihood of success over the long term. That includes incorporating market corrections and bear market events into your financial plan so that when periods of poor market performance occur (and it will occur), you’re prepared and have the perspective of knowing what their impact may be to your specific financial plans.

If periods of poor market performance have you nervous or you’re not really sure how your current financial plans are looking, schedule a time to speak with us here. We’re happy to offer you a no-cost consultation that may put your mind at ease and help provide a better perspective on how you’re progressing towards retirement, tax-efficiently giving to charity, saving for major purchases, or whatever your personal financial goals you may be.

Still curious to learn more about retirement planning? Check out the article below!

The #1 Hidden Retirement Risk You May Not Be Aware Of